For those unfortunate Canadians who owe significant personal debt, there is often a background story or some triggering event that helped lead to that situation. Say a job loss or a sickness in the family. But all too often, being in debt is caused by marital breakup.
The divorce rate in Canada is about 40%, or around 70,000 per year. Getting divorced is messy and complicated, and often means both parties are much poorer as a result. Where two incomes used to be the case, now one must suffice. And then there are the debts…
So whose debt is whose? Well, that’s up to the family court to determine, but with any joint (or co-signed) debts held between the couple are legally the full responsibility of each party. Not 50/50, but 100% owed by each party. That doesn’t mean 200% is owed, only that each party is fully responsible for 100% of the balance owing in case the other party defaults or files a bankruptcy or a proposal. The lender can come after each party for the full amount.
Debt doesn’t end when marriages do.
Each party will still be expected to meet their monthly legal obligations for their respective debt regardless of the divorce. And any new/future commitments such as apartment rentals, car loans etc. will need to be approved on that much less household income now. Credit ratings may suffer, and what was formerly a tough but manageable amount of debt can quickly become impossible.
Often people in this situation want to start over financially by clearing their unsecured debts as quickly as possible. Luckily, the law in Canada allows for this in two ways: either via a personal bankruptcy filing or what’s called a Consumer Proposal.
Either type of filing clears the unsecured debts of the person filing without regard to the other, even if there are joint debts. Keep in mind that the creditors will go after the other party for any amounts owed in full, not 50%. It’s also key to note that if one of the divorcing couple files, it does not affect the credit rating of the other party. So a bankruptcy or a proposal is often a desirable step to take in this situation. A proposal allows you to keep your assets while paying your debts off, usually at a heavily discounted rate of principle and always with no interest.
Eliminating heavy debts can help recently-divorced people to put most money issues behind them and rebuild their lives faster.